Skewed Wealth Distribution and the Roots of the Economic Crisis

by David Barber

David Barber is an assistant professor of American history at the University of Tennessee at Martin. He is the author of A Hard Rain Fell: SDS and Why it Failed (University Press of Mississippi, 2008).

Recently, Robert Shiller, a professor of economics at Yale University, penned a New York Times article warning that the fear of a double dip recession might actually bring on the dreaded event. “Ultimately,” Professor Shiller warned, “the risk resides largely in social psychology.”

As someone who is not a professional economist I do not know whether Professor Shiller’s views are typical of his field. What I do know is that while “social psychology” may have had some small role as a causal factor in the Crash of ’08, it was the actual structure of the American and world economies which brought on the crisis. And if in fact we enter a second round of this Crash, it will not stem from what Dr. Shiller calls a “weakness and vulnerability of confidence,” but will result from the same structural elements of our economy as those that brought on the “first dip.”

That is, if we picture an auditorium with one hundred people and one hundred seats, the single richest person would be able to spread out smartly over nearly forty-three seats. The poorest sixty people in the auditorium would have to make due squeezing into a single seat.

This mal-distribution of wealth does not bode well for a society based on the buying and selling of goods. Our super-rich plutocrats, after all, do not need more than five or ten automobiles or five or ten homes each. This top one percent—3 million people—certainly cannot purchase all the goods that the poorest 180 million Americans would be capable of purchasing had our society a more equal distribution of wealth.

And so debt has had to sustain our market economy: the more skewed the distribution of wealth has grown over time, the more frantically has the economy been forced to create a growing array of consumer debt mechanisms—subprime mortgages, payday loans, more and more intricately structured credit card debt—in order simply to maintain its functioning.

When a critical mass of poor and working class Americans could no longer pay their fabulously expensive subprime mortgages and usurious credit card bills, this house of cards collapsed. A number of the financial institutions built on this consumer debt foundered and the remainder required unprecedented injections of federal funds to remain afloat. The housing market and new residential construction, the market for consumer goods—automobiles, appliances, electronics—all crumbled, taking down with them the jobs of retirement savings of millions of Americans.

The Crash, in short, was not an episode of mass hysteria or panic; it represented a structural crisis in part rooted in the grossly unequal distribution of wealth in this society. When millions of Americans could no longer buy goods, industry had to stomp on the brakes.

And what is true in the United States of the unequal distribution of wealth, and of the consequences of that unequal distribution, is true again on a world scale. Nearly half the world’s population lives on $2 per day or less. This super-poor mass of humanity, from whose soil is ripped vast amounts of mineral and agricultural wealth, and out of whose labor the world’s manufactured goods increasingly come, are almost wholly excluded from participating in the world’s market economy.

These people, too, must depend upon debt, public debt in this case. More importantly, the survival of our world’s economic system, as it is currently configured, depends upon these people being both poor and indebted. But it is both the poverty and the debt which lead inexorably to the Crash.

It appears to me that Professor Shiller’s antidote to a second dip economic crisis lies in our all feeling better about the world economic system. Even before the Crash of 2008, however, that system self-evidently had failed the great majority of people on this planet. I would suggest that the real preventative to an extension or deepening of this crisis, and the only answer to the ongoing crisis which has been confronting poor people for a very long time, lies in a more equitable national and international distribution of wealth.

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More Comments:

Wyn Achenbaum -
7/21/2010

I share your point of view, as expressed here. If you're interested in how we might go about solving this problem, I commend to your attention the ideas of Henry George. You might start with "Social Problems" (online at wealthandwant.com, among other places -- there with an annotated table of contents) and "Progress and Poverty."